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Unilever - New Strategy shifts focus

Laura Hoy, Equity Analyst | 17 January 2022 | A A A
Unilever - New Strategy shifts focus

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Unilever plc Ordinary 3.11p

Sell: 3,936.50 | Buy: 3,938.00 | Change -2.50 (-0.06%)
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Unilever has announced it will focus growing its presence in Health, Beauty and Hygiene. The group plans to make major acquisitions in line with this initiative as it ramps up disposals of lower-growth parts of the business.

The group's identified GlaxoSmithKline's Consumer Healthcare business as a good strategic fit, but Unilever's most recent £50bn offer to buy the business was rejected.

Later this month management will announce a "major initiative" following the review of the current organisational structure that it expects will accelerate growth within its existing business.

The shares fell 6.2% following the announcement.

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Our View

Unilever's attempt to buy GlaxoSmithKline's Consumer Healthcare business and the strategy-shift outline that accompanied it came out of left field. Plans to double down on health, hygiene and beauty, were the driving force behind its attempt to buy Glaxo's healthcare business ahead of its proposed demerger.

On the surface, the deal has merit. Bringing Glaxo's established portfolio of brands under the Unilever umbrella could offer a springboard for growth at a time when consumer goods companies are staring down an increasingly difficult environment, as costs rise and people get pickier about their purchases.

But £50bn is a lot to spend for Unilever, especially considering the operational challenges that would come with the acquisition. GSK's healthcare business is not only saddled with debt, it's also full of medically-inclined products that will carry some level of regulatory red tape that Unilever doesn't have much experience with. The execution risk is heady.

Notably, the deal isn't going forward - though Unilever management seemed to indicate it was hopeful it would eventually. It does raise a few red flags, though.

Unilever's been working to build a volume-led strategy. But rising input costs mean the group's had to pass on some price increases to protect margins. That's sure to throw a spanner in the works - more expensive products don't tend to fly off the shelves when consumers are spread thin, as they are when inflation is high. Margins of close to 19% mean Unilever can afford to swallow some of those costs itself, but together with the marketing costs required to maintain a loyal following, we could be in for a run of margin stagnation.

Enter management's latest strategy, to focus on growth within Health, Beauty and Hygiene. But with very few details of how this sits with the existing strategy, it's hard to judge whether this is a measured change of course or an aimless shot in the dark.

That's not to say Unilever doesn't have its attractions, even with its new strategy in tow. The long-awaited sale of Unilever's global Tea business is in line with management's plans to dispose of slower-growth parts of business, in order to make room for potential acquisitions. Though we should note its €4.5bn price tag is hardly enough to justify a purchase like GSK healthcare.

Brand power and loyalty are Unilever's most powerful assets because they generally support increased prices and help boost margins. It's this visibility that keeps people buying branded products even as prices rise. While some of Unilever's customers might drop down to lower-priced unbranded products amid rising prices, many will still look for names like Dove and Ben & Jerry's on the shelves.

As an integral part of the global consumer supply chain, some level of revenue is pretty much guaranteed. This is why Unilever has long been considered a relatively defensive play. The huge scale and revenue visibility underpins the group's ability to pay a dividend, with a prospective dividend yield of 3.7%, though no dividend is ever guaranteed.

However, the increasingly challenging environment may be getting to Unilever and we're concerned about the direction of travel. If the GSK acquisition ends here, we think Unilever's new strategy could have merit, though we'll need more details to get excited. Right now, the future is too muddy for us to be overly optimistic about Unilever.

Unilever key facts

  • Price/Earnings ratio (next 12 months): 18.0
  • 10-Year Average Price/Earnings ratio: 19.2
  • Prospective dividend yield (next 12 months): 3.7%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Third Quarter Results (underlying) 21 October 2021

Revenue in the third quarter was €13.5bn, reflecting underlying sales growth (USG) of 2.5%. That was driven by price increases, as volumes fell across all categories. Full year sales growth is expected to be well within management's 3-5% target range and currently stands at 4.4% for the first nine months.

The board declared a quarterly interim dividend of 35.98p per share, with the ongoing share buyback programme to be completed by year end.

Revenue in Beauty & Personal care was up 2.6% to €5.7bn. Overall volumes declined 1.3% as an uptick in demand for Vaseline and Prestige Beauty brands, was offset by lower demand in skin cleansing and oral care. Prices rose 3.9% in response to rising commodity prices.

Home Care sales rose 1.4% to €2.7bn. This reflected a 4.8% price increase and a 3.2% volume decline as the group lapped last year's strong demand for household cleaning products. Cost inflation meant the group raised prices, particularly in Latin America, South Asia and Turkey.

Foods & Refreshment saw USG of 3.0% to €5.1bn. Volumes declined 0.8% as in-home ice cream demand was lower compared to last year and poor weather and travel restrictions in Europe weighed on out-of-home ice cream sales. Prices in the division rose 3.8%, the result of higher input costs.

Prices increased and volumes declined across all geographies. The Americas was the best performing region with USG of 4.4%. Asia, the Middle East and Eastern Europe saw sales rise 2.3% and turnover in Europe was broadly flat.

E-commerce grew 38% and now makes up 12% of total sales.

The group completed the separation of its tea business on 1 October and saw a net positive impact of 1.6% on sales from acquisitions and disposals.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.